Every trade you make on the markets should have an exit strategy. You must finish every trade sometime, and you have to know in advance how you will exit the swing trade or your investment position.
Why you must have a trade exit strategy
When your trade works well and your position moves as you expect, you can see a profit associated with your position in your broker’s account statement or an account real-time position report.
But I like to say this open profit is virtual. Why virtual? Because this money isn’t in your pocket. Only when you exit the trade, that is, sell the shares you bought, does the real money come into your account.
I have seen many traders who think of these virtual profits as a reality. And then the stock price moves in the opposite direction, and their virtual wealth evaporates. They can also let their profits turn into losses, the worst outcome. Such a scenario damages their mental and emotional capital a lot, too.
How to exit a trade
It’s very important to have your swing trade exit strategy well defined in your trading plan to know how to exit your trade.You can use two main exit strategies in position or swing trading.
1. Use a limit or a market order to close a trade
This strategy requires you to manually enter an exit order into your trading software to manage the order on your brokerage account. You typically find that the price is at the level when you have to close a trade.
Traders use this technique mostly to close a trade at a profit target or near that level. They know the price is already at the level they set as a target for the trade.
The trading plan defines when to close the trade. So, place your exit order as soon as you receive an alert that the price has reached the target level or your target is close to the actual price.
2. Automatic stop-loss order activation to close a trade
A stop-loss order is an order you put into your broker’s trading software or system. It’s an order that activates when the price triggers the level set in the stop-loss order. This type of exit often happens automatically since the order is already in the broker’s system.
A stop-loss order can protect you against a big loss in any trade. So, place it immediately after you enter a trade. You can place this order as a day order or good till cancel (GTC).
You have to change a stop-loss order trigger price as your trade moves as you expected. That means you should change a trigger price from the starting level to a new level in your favor. You should define how and when you change this price level in your trading plan for every trading strategy. This style is as trailing stop strategy. It means that after several changes you move the trigger price to a level that you’ve already protected a profit, that is, you know already that when the price will trigger, the trade will close with a profit.